The May 6 flash crash was a crazy event, the Dow plunged 998 points and stocks like dropped from $40 to a single cent in the span of minutes. Debate on what may have caused it has been never-ending, from the fat finger theory to shitty trade execution getting the blame for it, but one guy has stepped up and says he knows why it happened, and claims that it WILL happen again.
From this Forbes article, Eric Scott Hunsader, CEO of Nanex, claimed that some fiendish quant may have been responsible for it, and has outlined 3 reasons why it will happen again:
The last one was caused on purpose.
The average quote volume on the NYSE is 10,000 per second. At one point on May 6, somebody launched 5,000 quotes at the NYSE for the ticker of Public Storage inside of one second. None of those quotes led to a trade--but that traffic by itself took the NYSE to 25% of its stable CQS capacity. So it's clear that one trader or perhaps more discovered that by blasting the NYSE, they could introduce added latency in the CQS feed. Knowing that most players were looking at a delayed NYSE feed, anybody in the know could make easyplays between the NYSE and other exchanges.
Because mini flash crashes have happened before.
On April 28, for instance, the share prices of Wal-Mart and Procter dipped 50 cents for less than a second. If algorithms had been programmed knowing the dip was coming, profits are fat and easy.
The system has shown big delays more than once since then.
It seems that whenever the NYSE receives more than 20,000 quotes per second, its CQS feed, which determines where many equity orders get routed, falls behind.
Hunsader is also known for exposing "quote stuffing"- a method he argues quants may use to disrupt competitors by giving out very high rate bursts of quotes (up to 5000 quotes per second) and snatch invaluable processing time to grab the bid/ask spread themselves.
I'm curious what the quants here have to say about this, I know it sounds a little Bond villain like but I don't think it's a stretch to think that someone out there may be manipulating the markets with algos like this. Could a transaction tax kill this practice? How could this be regulated?
What do you guys think?
Bonus vid of some guy flipping out during the flash crash;